EC201 chapter 12
What is the relationship between a perfectly competitive firm's marginal cost curve and its supply curve?
A firm's marginal cost curve is equal to its supply curve for prices above average variable cost.
A buyer or seller that is unable to affect the market price is called
price taker
Why do single firms in perfectly competitive markets face horizontal demand curves?
With many firms selling an identical product, single firms have no effect on market price.
What is a price taker?
a firm that is unable to affect the market price.
In the short run, a firm's shutdown point is the minimum point on the
average variable cost curve, while in the long run, a firm's exit point is the minimum point on the average total cost curve.
It is possible for profits to increase even if revenue decreases if
costs decrease more than revenue decreases.
In a perfectly competitive market, P = MR = AR because
firms can sell as much output as they want at the market price.
What is meant by allocative efficiency?
is produced up to the point where price equals marginal cost.
Despite the fact that few firms sell identical products in markets where there are no barriers to entry, economists believe that the model of perfect competition is important because
it is a benchmark—a market with the maximum possible competition—that economists use to evaluate actual markets that are not perfectly competitive.
When are firms likely to be price takers?
it represents a small fraction of the total market
What are the three conditions for a market to be perfectly competitive?
many buyers and sellers, with all firms selling identical products, and no barriers to new firms entering the market.
In the long run, perfect competition
results in allocative efficiency because firms produce where price equals marginal cost.
What determines entry and exit of firms in a perfectly competitive industry in the long run? In a perfectly competitive industry in the long run,
new firms will enter if existing firms are making a profit and existing firms will exit if they are experiencing losses.
If the market for beer were perfectly competitive, the location of breweries would
not matter to consumers since the product would be homogeneous.
Perfectly competitive firms should produce the quantity where
the difference between total revenue and total cost is as large as possible.
Which of the following best represents profit per unit of output?
the distance between the points
Which of the following best represents total profit?
the shaded rectangle
Why are firms willing to accept losses in the short run but not in the long run?
there are fixed costs in the short run but not in the long run.
Suppose the market for cotton is perfectly competitive and that input prices increase as the industry expands. Characterize the industry's long-run supply curve. The cotton industry's long-run supply curve will be
upward sloping because the long-run average cost of production will be increasing
What is meant by productive efficiency?
when a good or service is produced at lowest possible cost.
